Gratuity Calculation Confusion: How to Handle Allowances and Maximum Limits?

Gratuity Calculation Query

Please help me with the following gratuity matter.

1) As per the Act for the calculation of gratuity, you need to take the last Basic + D.A. amount. However, in our salary structure, we don’t have a D.A. component. Instead of D.A., we are considering another allowance component (which is a significantly higher figure than other components, and management is agreeable to this). My question is, is the method we are using by taking Basic + other allowance correct?

2) One of our employees (Top Management) has completed almost 8 years in our company (he is still working with us). When he leaves the company, he will be eligible to receive his gratuity from the company. At this moment, his Basic is Rs. 2,00,250, and the other allowance is Rs. 101,752. This means the gratuity he will receive is Rs. 13,93,855 (200250+101752*8*15/26). As per the Act, the maximum limit of gratuity is Rs. 10 lacs. Now, my question is, how much gratuity will he get if he leaves the company—Rs. 10 lacs or Rs. 13,93,855? If only Rs. 10 lacs, then what about the balance Rs. 3,93,855?

Waiting for your valuable reply.

Thanks & Regards,

Vaishali

No, it's incorrect. D.A. means Dearness Allowance. You can't add other components of salary for calculating gratuity. If your organization's salary structure is Basic + HRA + CONV + OTHER ALLOW and there is no D.A., then you will calculate gratuity based only on the Basic Salary. If an employee completes 5 years of service, they are eligible for gratuity, and the formula is:

Basic + D.A. * 15/26 * number of years of service.

No, it's wrong. You can't add any other allowance to the basic for gratuity because the gratuity formula is BASIC + DA / 26 * 15 * COMP. WORKING YEARS. The maximum limit of the gratuity amount is 5,00,000.

Hi, if his last exit month's basic salary is ₹2,00,250, then his gratuity will be ₹9,24,230.

I agree with Amit. The eligibility for Gratuity, as per the act, indicates that Basic and DA are subject to completion of 5 years of service. If DA is not shown in the wage register, only the basic salary should be taken into account for the computation of Gratuity by excluding all allowances. The formula has already been mentioned by Mr. Rishirajmishra and is currently in force.

Regards,
Adoni Suguresh
Retired Senior Executive (P&A)

Please note that the maximum limit of the gratuity amount is Rs. 10 Lakhs.

Thank you!

Please remember that if the employer is required to comply with the statutory provisions of the Payment of Gratuity Act, 1972, then they must adhere to the provisions of the Act. The definition of "wages" is well known to you. You will agree that if there is no DA component in your salary structure, then you have to calculate your gratuity amount based solely on your "Basic" salary. What has been mentioned in all the Acts, in general, and the PG Act in particular, is a MINIMUM. If your employer is willing to calculate the gratuity amount considering Basic + other allowances, there is no BAR, and the same is perfectly in order.

As regards your second query, on the same analogy as mentioned above, though Section 4(3) of the Act limits the gratuity amount to TEN lakhs, there is no bar for an employer to give OVER & ABOVE the statutory limit provided in the Act.

Regards,
BS Kalsi
Member since Aug 2011

Dear Sir, I just want to know, I have an employee who has been working with us for 8 years, but he was on probation. Is he eligible for gratuity and what is the maximum amount we can provide him as gratuity if his amount exceeds Rs. 10 Lac.

Regards, Suman Shrivastav

Dear Suman Shrivastav, when you ask a query, please remember to give all the details concerning the type of establishment, number of persons employed, components of the salary of the employees, etc., because such information will facilitate a correct reply/answer. In the absence of detailed information, I am bound to give a general reply, which is as follows:

If your establishment is covered under Section 3 of the Payment of Gratuity Act, 1972, then you are under a statutory obligation to pay gratuity to all persons who leave (by reaching the age of retirement or resignation) after completing a continuous service of five years, except in cases of death or disablement, where a five-year period is not necessary.

Now, regarding your query about the employee who has been working with you for 8 years but was on probation, let me clarify that under the definition of 'employee' in Section 2(e), only the apprentices appointed under the Apprentices Act, 1961, are exempted. You are not allowed to keep a person on probation lifelong or as you wish. There are certain norms or guidelines for keeping a person on probation; otherwise, it may be considered as "victimisation" or "exploitation."

A 'probationer' is defined under "Model Standing Orders" as one who is provisionally employed to fill a vacancy in a permanent post and has not completed three months of service in that post unless the probationary period is extended. If a permanent workman is employed as a probationer in a new post, he may, at any time during the probationary period not exceeding three months, be reverted to his old permanent post unless the probationary period is extended. The maximum period, however, shall in no case extend beyond one year. While there has been a practice to appoint persons on probation for a period of two years, probation for a continuous period of eight years is beyond imagination.

It is not clear from the details of his salary whether it is yearly or monthly; hence, it is not possible to calculate the amount of gratuity.

Regards,
BS Kalsi
Member since Aug 2011

Dear all,

Let us all remember that the Payment of Gratuity Act is normative legislation; it sets norms below which you can't pay. Including any component (besides basic pay & DA) for the calculation of gratuity is the prerogative of the organization. The same is true for the quantum. The only thing is any payment in excess of what is laid out in the Act may not be accepted as a business expense by the income tax authority; such 'excess' payments are not illegal.

Regards,
Shrikant Prabhudesai
[Email Removed For Privacy Reasons]

Thanks for the feedback. However, the question that remains is if the limit for Gratuity paid is 10 Lakhs, what happens to the balance exceeding 10 Lakhs? For instance, if an employee's total gratuity amount is 13 Lakhs, what will happen to the remaining 3 Lakhs? Will the company pay the additional amount, or will it lapse? If the company is required to pay the excess amount, how will this be handled?

Payment of Gratuity Act: Tax Implications

The Payment of Gratuity Act is normative legislation; therefore, the entire gratuity amount above Rs. 10 lakhs can be paid. However, there are income tax considerations. The employee will have to pay income tax on amounts over Rs. 10 lakhs, and the employer may not be allowed to show payments beyond Rs. 10 lakhs as a business expense.